Will Portugal Follow Greece Into Debt Relief?

Despite the official line that the Greek debt situation was unique, the chances of further debt restructurings in Europe are growing.

The bond markets seem to be preparing for a Greek-style debt reduction in Portugal. Portugal's 10-year bonds were trading at a 47 percent discount to face value on Friday. Its 10-year debt yields 13.71 percent. This is an improvement from January's record high of 18.29 percent, but still far from any level indicating confidence or sustainability. The bonds are rated "junk" by Moody's, S&P and Fitch.

Almost every news story on the situation in Portugal quotes a bond market participant proclaiming that the end is nigh.

Last week, German Finance Minister Wolfgang Shaeuble described Greece as a "completely unique case." Bloomberg cites Vitor Constancio, ECB vice president and former Bank of Portugal governor, as saying that Portuguese austerity measures were on track — denying that the Greek restructuring would need to be repeated.

"Portugal is the prime one. Estimates of interest rates and economic growth from the International Monetary Fund suggest that, in order to keep its debt burden stable, the government would need to run a primary budget surplus (excluding debt payments) of nearly 2 percent of gross domestic product — a feat it has achieved in only three of the past 17 years. If it wrote down its debts by 40 percent, the required surplus would be a much more manageable 1 percent of GDP," the Bloomberg editors argue.

The real question might not be whether Portugal will get restructured, but whether debt relief can be confined to just Portugal and Greece. Bloomberg figures that Ireland might be in for some minor restructuring but that this is unnecessary for Spain and Italy.

This may be true on a purely financial level. It is possible that Spain and Italy will not absolutely need to default. But just as there are wars of necessity and wars of choice, there are defaults of necessity and defaults of choice. Greece was a default of necessity. There was no way it could pay its debts as they came due. For Italy and Spain, a default could come as a result of domestic political demands, rather than the absolute unavailability of funds.

Italian and Spanish voters and politicians could easily look with envy at the debt relief successfully demanded by Greece and seek it out for themselves. Threats about losing access to "credit markets" may not have as much credibility as they once did.